Construction spending on the rise

July 12, 2012

WASHINGTON - A surge in homebuilding pushed U.S. construction spending up by the largest amount in five months, the latest indication that the housing sector is slowly recovering.

Construction spending rose 0.9 percent in May from April, the Commerce Department reported recently. It was the second straight monthly increase and the biggest percentage gain since December.

The May increase pushed spending to a seasonally adjusted annual rate of $830 billion. That is 11.3 percent above a 12-year low hit in February 2011.

Article Photos

This recent photo shows a new homes under construction in Bridgeville, Pa. A surge in homebuilding pushed U.S. construction spending up by the largest amount in five months, the latest indication that the housing sector is slowly recovering. Construction spending rose 0.9 percent in May, following a 0.6 percent rise in April, the Commerce Department reported earlier this month. It was the biggest percentage gain since December. (AP photo)

In this recent photo, the Checkered House Bridge is under construction in Richmond, Vt. Construction spending in May showed the biggest percentage gain since December. (AP photo)

The construction industry is flashing signs of improvement while others parts of the economy have slumped.

Spending on both residential and nonresidential projects rose in May. That shows private builders are starting to have more faith in the housing market and commercial real estate.

But spending on public projects fell to the lowest level since November 2006. That largely reflects tighter government budgets at the state and local level and fading federal stimulus dollars.

Steven Wood, chief economist at Insight Economics, said the overall picture for construction was brighter. But he noted that the industry has a long way back to full health.

"Construction spending appears to be slowly climbing, emphasis on slowly, out of a very deep hole," he said.

Spending on nonresidential projects rose 0.4 percent in May to an annual rate of $299.1 billion, the third straight monthly gain. In May, spending on shopping centers, hotels and office buildings all saw gains.

Government construction projects fell 0.4 percent to an annual rate of $269.6 billion. Spending at the state and local level fell 1 percent to $242.6 billion at an annual rate. Federal construction rose 5.6 percent to a rate of $27 billion.

Recent data suggest the housing market is gradually improving after struggling for the past five years.

Homebuilders started work on more single-family homes in May and requested the most permits to build homes and apartments in three and a half years. Completed sales of new and previously occupied homes were up in May from the same month last year. The number of people who signed contracts to buy homes rose in May to match the fastest pace in two years.

Home prices are rising in most markets, and mortgage rates have tumbled to the lowest levels on record, which has encouraged more buying.

One reason prices are rising is the supply of homes for sale remains extremely low. There were 145,000 new homes for sale in May. That's just 1,000 higher than in April, when the supply was the lowest on records dating back to 1963.

With the supply thin and sales rising, builders can charge more. It also means there's room for more competition. Economists said that may explain why builders are laying plans for more homes and apartments over the next 12 months.

Still, the market is long way from returning to full health. A sluggish job market could deter some would-be buyers from making a purchase this year. The U.S. economy created only 69,000 jobs in May, the fewest in a year. The unemployment rate rose to 8.2 percent last month from 8.1 percent in April.

While spending on homebuilding has risen, spending on government building projects has fallen. Governments at all levels have been struggling to deal with huge budget gaps caused by the recession.

The economy grew at a tepid annual rate of 1.9 percent in the January-March quarter. Residential construction added to growth. But many economists expect growth slowed in the April-June quarter.